Options Must Be Expensed, Panel Says

The New Rule Kicks In June 15, According To The Board That Sets Accounting Standards.

December 17, 2004|By Carrie Johnson, the Washington Post

WASHINGTON -- Accounting standards rulesetters Thursday issued a long-awaited plan requiring companies to treat stock options as expenses on their books, even as lobbyists vowed to derail the initiative before it takes effect in June.

After two years of effort, the Financial Accounting Standards Board published a controversial 27-page standard that will cut reported profits at technology companies and other businesses that make heavy use of stock options as a compensation tool.

Options give employees the right to buy stock at a set price within a specific time frame. Currently they are reflected as footnotes to financial statements but do not appear on the income statement itself.

The plan "will provide investors and other users of financial statements with complete and unbiased financial information," board Chairman Robert Herz said in an afternoon conference call with reporters.

Board member Michael Crooch added that recognizing the cost of stock options will help investors evaluate the "relevance, reliability and comparability" of financial data across companies.

Large public companies will be required to begin expensing options in financial statements beginning June 15, 2005. Smaller companies will be required to comply beginning Dec. 15, 2005.

About 750 publicly traded companies in the United States already voluntarily expense options, according to a report by Bear, Stearns & Co. A similar plan released for non-U.S. companies by international standards setters will take effect next month.

The board's move follows a decade of bitter disputes with lobbyists for technology companies. The standards setters backed away from an earlier proposal a decade ago under intense pressure from industry groups, whose members argue there is no reliable way to determine the value of options.

Jeff Peck, the chief lobbyist for the International Employee Stock Options Coalition, which opposes expensing options, said he would continue to press ahead with a plan to kill or delay the board rule over the next six months.

The House of Representatives voted 312-111 last summer to require further study of options expensing. But a similar measure bogged down in the Senate, despite widespread bipartisan support.

Longtime proponents of options expensing on Capitol Hill cheered the board's move Thursday and urged their colleagues not to tamper with the work of the independent accounting board.

"It is critically important to keep U.S. accounting rules out of politics, which means allowing the experts at FASB to do their work," Sen. Carl Levin, D-Mich., said in a prepared statement.

Sen. Peter Fitzgerald, R-Ill., said that only three years after scandals at Enron Corp., WorldCom Inc. and other companies, Congress "should be trying to ensure that corporate earnings reports are more, not less, reliable."

But opponents of the plan, including venture capitalists and electronics trade associations, said it was "badly flawed" and cited other new financial reporting requirements as a reason for even more delay.

Donald Nicolaisen, the SEC's chief accountant, said in a prepared statement that debate on the issue so far has been "open, rigorous, and appropriate." He said that companies should focus their energy on implementing the plan and that the SEC is "preparing to provide appropriate guidance" to help companies comply with the standard.

The board, which is a private group, establishes standards for accounting and financial reporting. Its standards are recognized by the SEC.